Category Archives: PSST and Macro

Michael Barone praises my new book

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At the end of his piece, He writes,

Donald Trump’s promise to “make America great again” promises restoration of a rosily remembered but largely mythical past. Abrogating trade agreements won’t create half a million auto and steel jobs. Trump’s penchant for deal-making and crony capitalism means propping up insiders and preventing job creation.

Kling says he’s voting for Gary Johnson. You can see why.

So evidently he reads the blog, also.

By the way, there are only two reviews of the book on Amazon, and both are rather terse. So when you’re finished reading it, . . .

Yuval Levin praises my book

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Actually, he praises two of them.

His 2013 book The Three Languages of Politics is a great example of that. The book sheds a bright light on our political life by arguing that progressives, conservatives, and libertarians tend to see political questions as arrayed along three distinct axes: Progressive think about politics along the oppressor/oppressed axis; conservatives think in terms of the civilization/barbarism axis; and libertarians think in terms of the freedom/coercion axis. . .Try that insight on for a minute as a lens through which to look around at our politics and you’ll find that an awful lot of our debates make much more sense.

Kling’s latest book, out this week and available practically for free on Amazon, is to my mind his greatest contribution yet. Specialization and Trade: A Re-introduction to Economics, is as ambitious as its subtitle suggests. Kling argues that our understanding of the fundamental character and purpose of the discipline of economics has been distorted by the form that the professionalization of the discipline has taken.

Those are just excerpts. More kind words at the link.

My Essay in Canada’s National Post

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It came out yesterday.

Macroeconomics, which is the branch of economics that purports to connect fiscal stimulus with employment, tries to ignore the evolution of PSST. Interestingly, macroeconomics straddles the too-concrete thinking of the public and the too-abstract thinking of the academic elite.

The essay is based on my new book, which rose to #1 on Amazon in the narrow category of macroeconomics.

The New Consensus on Macroeconomics

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Noah Smith writes,

Assuming Wolfers and DeLong and I aren’t just blowing smoke out of our rear ends, and DSGE models really don’t work, why do so many macroeconomists spend so much time on them?

Pointer from Mark Thoma. Smith refers to Brad DeLong’s post, in which he writes,

DSGE macro–has indeed proven a degenerating research program and a catastrophic failure: thirty years of work have produced no tools for useful forecasting or policy analysis.

As for Noah’s possible explanations for how the profession got into that cul de sac, and why it remains there, I vote for a combination. I endorse the following snippets of his post:

Maybe since macro data is very uninformative, no one actually knows what good research looks like, so they all settle on some random thing

In my new book, I say that economists in general, and macroeconomists in particular, deal in interpretive frameworks rather than in testable hypotheses.

it’s just fun for some people to do

I always suspected that Stan Fischer and Olivier Blanchard liked their preferred models because they found the math fun. They found it even more fun when they could see that other people had trouble following the math.

if the prevailing research paradigm is not really better than alternatives, then you probably want macroeconomists who are willing to “play the game”, as it were. So DSGE might be an expensive way of proving that you’re willing to spend a lot of time and effort doing silly stuff that the profession tells you to do.

Sad, but true.

I see this as vindication. During the thirty years that I abandoned interest in academic macroeconomics, I missed nothing. It was not me that was being obtuse. It was the profession.

You can now read my latest book!

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This link goes to the Kindle version, which will set you back $4 (or is it free?), plus your time. Paperback version will be available soon.

As of this moment, the Amazon site calls me the “editor” of the book rather than the author. That will be corrected eventually.

The main point of the book is that you need to keep in mind the overwhelming complexity of specialization in a modern economy. Non-economists miss it when they use simple intuition. And academic economists tend to miss it when they build their “models,” particularly of the GDP factory.

Any reader of this blog will be able to follow the book. But what I really want is for everyone who is about to start graduate school in economics to read this book. I want to say to such students, “Don’t get too suckered in by what your professors are going to be showing you about how to do economics. Don’t let them lead you to forget about specialization and trade.”

Real Wages and Output Fluctuations

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Tyler Cowen writes,

Here’s the catch: on the internet I’ve read dozens — no, hundreds of times — that real wages haven’t gone up more because the Fed chokes off real wage hikes every time the economy nears recovery. You will notice that this claim is simply flat out wrong if the mainstream view of real wage acyclicality is correct.

The issue of real wages and output fluctuations is an excellent illustration of the way that Keynesian macroeconomics operates.

1. At the crude level, Keynesians speak as if real wages go up as output goes up. This is classic, “spending creates jobs, jobs create spending” thinking, which is not good economics. However, you can catch Ph.D economists talking this way.

2. At the abstract level of models, a very standard macroeconomic theory is that output fluctuations are movements along a labor demand curve. That means that as real wages go up, output goes down. This is a core element in Scott Sumner’s macroeconomic analysis, for example.

3. Empirically, it is very hard to spot any strong correlation, positive or negative, between real wages and output.

So macroeconomists will let the public think (1), will build a model that says (2), and when pressed will admit (3). And nobody calls them out on it.

Back to the 1960s

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Olivier Blanchard writes,

The IS relation remains the key to understanding short-run movements in output. In the short run, the demand for goods determines the level of output. A desire by people to save more leads to a decrease in demand and, in turn, a decrease in output. Except in exceptional circumstances, the same is true of fiscal consolidation.

Pointer from Scott Sumner, who disagrees for different reasons than mine.

In the 1960s, macro was distinct from micro, and few people worried about that. If “spending creates jobs and jobs create spending” was contrary to Walrasian general equilibrium, then so be it. By 1985, the situation (at the graduate level) was totally reversed. Every macro model had to nod in the direction of general equilibrium. It stayed that way until 2008.

Now, the best that MIT economists can do is revert back to 1960s thinking. In my forthcoming book, I offer the alternative of PSST.

Did You Visit the Same Country?

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Atif Mian and Amir Sufi write,

we highlight the increasing body of macroeconomic evidence on the link between household debt and business cycles.

Dean Baker writes,

while it has become fashionable to cite the importance of debt in explaining the severity of the downturn following the collapse of the housing bubble, it really doesn’t fit. The severity of the downturn can easily be explained by the loss of wealth and the end of the construction boom, debt is at most a secondary consideration.

Pointer from Mark Thoma.

One point that Baker makes is that, in terms of employment, the recovery from the recession that coincided with the dotcom crash was very weak. What I would say, from a PSST perspective, is that we have had a lot of structural change over the past 20 years, and the process of creating new patterns of sustainable specialization and trade has generally operated more slowly than the process of making some old patterns unsustainable.

Goldilocks Economics

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It occurs to me now that this might have been a good title for my latest book. Here is my thought process.

1. Economic thinking can be too simple or too abstract. What I call Goldilocks economics involves thinking about specialization and trade, and in particular the implications of the extremely complex patterns of specialization and trade in the modern world.

2. Too-simple thinking tries to generalize from what you see in your immediate world as a consumer or in the workplace or in a small segment of society. It comes from not having absorbed enough economics to understand Goldilocks economics. In the book, examples of too-simple thinking include using a camping trip as a model economy or thinking that “sustainability” means conserving a particular resource.

3. Too-abstract thinking is what academic economists undertake and force their grad students to undertake. The exercise of “modeling” creates a false impression of scientific endeavor. Mathematical and statistical models look like the sorts of things that engineers use to design machines, but that appearance is deceptive. The economic world is not as straightforward to manage as a machine.

4. Interestingly, macroeconomics manages to straddle both too-simple and too-abstract thinking. Keynesianism in its popular form uses the too-simple notion that spending creates jobs and jobs create spending. That is how most economic journalism treats it, and that is how many freshman macro classes treat it. What gets taught in grad school as macro is something completely different–very abstract.

5. Economists have never found it easy to reconcile the too-simple version of Keynesianism with standard microeconomics. So what can be done?

a. Say that macro is true in its own way, and micro is true in its own way, and don’t bother trying to reconcile them. That was the state of things around 1965, and much of the profession seems to have reverted to it since 2008. But choosing to ignore the discrepancy does not make it go away.

b. Say that macro is just dynamic stochastic general equilibrium theory. Try to explain macro fluctuations in terms of people time-shifting their decisions to work and consume. Maybe there is a more charitable way of putting it. This approach dominated the profession for thirty years–right up to the point in 2008 when Olivier Blanchard was telling us that “the state of macro is good.” Although it still has some adherents, I have always thought that it was garbage.

6. As of 1965, the too-abstract approach to Keynesian economics was the large-scale macroeconometric model. As of 1980, it was the rational expectations mathematical model, eventually becoming the DSGE model. Today, you show your Keynesian colors by uttering magical phrases like “zero bound.”

7. In either the too-simple or too-abstract formulation, Keynesianism treats the economy as a GDP factory. Specialization is assumed away.

8. The Goldilocks approach is PSST. Instead of thinking of jobs as created by spending, think of them as created by the discovery of sustainable patterns of specialization and trade.

Preview of My New Book

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From the May-June issue of Cato Policy Report (I did not write the preview, or even read it before it came out, but it provides a good foretaste).

while Kling’s primary audience is other scholars of economics, his writing also provides a first-rate introduction to economic ideas that are easily accessible by students with little or no previous training in economics.

Think of this as the book that every first-year economics graduate student should read (but won’t).

Here is a provocative sentence:

Kling argues that post-World War II economists have mistakenly placed the concepts of scarcity and choice at the center of economic thought.

While scarcity and choice are certainly important concepts in economics, I have two problems with making them central.

1. Scarcity and choice are concepts that focus on a fixed pie. Yet economic growth and the enlargement of the pie are what matter most.

2. Scarcity and choice are taught using “2×2” economics. That is, a choice between 2 activities, hiding the fact that there are millions of specialized tasks in the economy.

These two problems are related. The growth of the pie is the effect of specialization that is vast and mind-boggling in its complexity.

Also, consider where macroeconomics fits in. Your choices are:

1. Treat macro as something that departs from and even contradicts micro. This is the way things worked in the 1960s, and it is where most of the profession seems headed again today.

2. Do macro as general equilibrium theory. This was the attempt to integrate micro and macro in the 1980s, an attempt that strikes me (and others) as having failed.

3. Think of both micro and macro in terms of patterns of specialization and trade. In macro, the focus is on the process of old patterns becoming unsustainable and the process of finding new patterns that are sustainable.

The book makes the case for (3). Along the way, as the preview points out, it takes a hard swipe at MIT-influenced economics for being mistakenly mechanistic in its approach to both micro and macro.